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The equity you have in your home is the difference between the value of the home you own, less any mortgage you may have on it. Equity release is the term given to unlocking or making available some, or all of this value whilst continuing to live in the property. This can be achieved through two different types of plan, either a lifetime mortgage, which is based on raising a loan against the value of your home; or a home reversion plan, under which all or part of the property is sold to a home reversion company.
You can release some of the equity in your home to give yourself a tax-free lump sum, a regular tax-free income, or a facility enabling you to borrow against the property as and when required in the future up to a predetermined level. The cash you receive from a plan is tax-free because only your liquid assets change, not your total wealth or income.
The maximum amount of any equity release is determined by the property value, your age(s) and sometimes your health. This will vary between lenders and the type of plan you choose.
You can live in your home until you and, if the property is in joint names, your partner dies provided your lifetime mortgage or home reversion plan is in joint names. The property is then sold and the proceeds used to pay the accrued debt. Any surplus will form part of your estate. For example, if you have moved into a care home – you would then normally, in the case of a lifetime mortgage, pay the money back to the lender together with the interest accrued from the proceeds. In the case of a home reversion plan, the company would retain the proportion of the proceeds relating to the share of the property they purchased.
Why consider an equity release plan?
When you take out any type of equity release plan you use part of the capital tied up in the value of your home to raise extra income or a cash lump sum, or both. You keep the right to live in your home for the rest of your life.
There are many reasons why you may be thinking about equity release.
• Your home may be your most valuable possession and investment, but you may be ‘asset-rich and cash-poor’ – living in a valuable property, with the mortgage paid off, but surviving on a relatively low income.
• If you have been retired for some time you may find that your income and savings do not meet all your financial needs. Your day-to-day living costs may have gone up while your income has stayed unchanged, or gone down, due to inflation or low yields from investments and savings
• You may want to get hold of a cash lump sum to pay for repairs or adaptations to your home, or to replace a car or pay for ‘extras’ such as holidays. You may want to raise some cash to help your children or grandchildren. Turning some of the value of your home into cash can help pay for any of these things – cash raised through an equity release plan does not have to be spent on your home or used to buy an annuity.
It is, of course, vital that you realise that once you spend this money, it has gone – just as if it had been any other kind of savings or income. You need to consider very carefully just how urgent your financial needs are, and whether an equity release plan is the best way of solving the problem. Any plan you take out will have an effect on the equity in your home, and on the value of your estate when you die. For more information please contact us.
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